Public Debt in a Descriptive Endogenous Growth Model

In this paper we analyze a descriptive endogenous growth model with public debt. The government runs into debt, but, the primary surplus is a positive function of public debt such that the debt to GDP ratio becomes a mean-reverting process. A balanced budget scenario yields a higher long-run growth rate than a scenario with permanent deficits if and only if the public deficit exceeds the net saving out of government bonds. Further, multiple balanced growth paths can arise and reducing the reaction of the primary surplus to public debt can generate endogenous cycles via a Hopf bifurcation.